Banking Special: Good Growth Prospects In Oman

Oman’s economy and its banking sector are performing well.



With the proposed increase in spending by the government on infrastructure to boost opportunities for the banking sector, prospects for Omani growth are sound.

GDP growth of around five per cent is expected for 2012, aided by increased hydrocarbon revenue and government sector is expected to grow to six per cent.

Oman was hit by protests and strikes in 2011 as young people, inspired by uprisings in other Arab countries, demonstrated for better jobs and higher salary. Unemployment among nationals is high and remains a major social concern. In an effort to contain the disturbances, the country’s ruler announced plans to create 50,000 jobs and unveiled an expenditure programme, which included funding towards employment generation, higher cost of living allowances, as well as increased pension and social security payments.

Many benefits were extended to Omanis working in the private sector, such as raising the minimum wage and the establishment of an unemployment benefit. Around 44,000 new government positions were created in 2011 and the budget for 2012 provided for the employment of another 36,000.

Oman’s ruler also revamped ministries in 2011. The powers of the consultative council, the Majlis al Shura, were also widened following October 2011 elections. In response to public demand, legislative powers were granted to the Majlis al Shura which previously held only an advisory role. The above timely intervention of the ruler and the promise of salary increases and higher welfare spending helped to normalise the situation in the country.

Major projects in progress in Oman include a rail network and new air and sea ports. In addition, the Sohar and Duqm industrial areas are expected to see a burst of activity in the petro- chemicals, oil-refining, metals and other industrial sectors as investments worth billions of dollars get underway.

The banking sector expects lending opportunities in the consumer segment to rise, given the substantial increase in salaries for public sector employees announced by the government since 2011 and new job creation for Omanis. Local banks rely heavily on revenues from consumer lending (capped by the central bank at 40 per cent of loans).

Unlike the central bank in the UAE, the Omani central bank has not interfered so far in setting maximum loan values (as salary multiples), debt to income ratios or maximum loan tenors. However, rising levels of personal indebtedness has prompted the central bank to encourage local banks to set more conservative lending criteria. This could reduce the consumer loan growth rates of local banks.

Omani banks have little exposure to the Eurozone. Moreover, with about 80 per cent of Oman’s oil-dominated exports going to Asia, the impact of the European crisis is limited as long as it does not lead to a significant fall in oil prices.

However, the problems in the Eurozone have impacted the availability of overseas funding for the banking sector.

The combined assets of commercial banks increased by 18 per cent to OMR18.4 billion in 2011, while total credit expanded by 17 per cent. Similar increases are expected for 2012. Credit to the private sector and public enterprises expanded by 13 per cent and 58 per cent respectively.

Oman’s ruler issued a decree in 2011 allowing the establishment of Islamic banks and permitting conventional banks operating in Oman to offer Sharia-compliant products and services. Oman’s biggest domestic banks have set up Islamic banking windows. Bank Muscat has created Meethaq for Islamic financial services while National Bank of Oman (NBO) has set up Muzn. NBO is 35 per cent owned and managed by Commercial Bank of Qatar (CBQ). NBO will be able to introduce CBQ’s Islamic banking product range without incurring major product development costs. Oman’s Bank of Sohar and Ahlibank have also built Islamic banking infrastructure.

The foreign players in the Omani market, such as HSBC, are likely to follow in due course.

Two new banks have been granted provisional Islamic banking licences in Oman. The Islamic banks are bolstering their balance sheets to challenge the country’s larger conventional lenders. In June 2012, Bank Nizwa, the first Islamic bank in Oman, attracted OMR681 million ($1.77 billion) of bids, 11 times what was needed, in a successful share sale.

In September 2012, Al Izz Islamic bank, Oman’s second Islamic bank, opened subscription for its initial public offering of 40 per cent of the lender. Abu Dhabi state-linked Aabar Investments and Tasameem holds 60 per cent of Al Izz, alongside First Energy Oman and Huriah, an Omani company.

The Islamic banks will likely quickly gain financing assets as well as deposits, increasing competition in the Omani banking market. Both Al Izz and Bank Nizwa, as well as the conventional banks, are awaiting final guidelines on sharia-compliant lending from the central bank and regulations from the capital market authority on the issue of Islamic bonds.

In 2012, HSBC Bank Middle East Ltd (HSBC) gained approval to merge its HSBC Oman operations with Oman International Bank (OIB). The two institutions had entered into an agreement earlier in the year.

Following the merger, HSBC holds 51 per cent cent of the combined entity, which has been renamed HSBC Bank Oman. OIB was Oman’s fifth largest bank with the second largest branch network in the country, and had assets of $3.2 billion at the end of 2011.

At end 2011, HSBC Oman had assets of $2.5 billion. The HSBC Group will provide support services to HSBC Bank Oman under a services agreement with an initial term of 10 years. The move reflects the business opportunities in Oman going forward, with a stable environment and growing economy.

Bank Muscat, Oman’s largest bank controlling around 39 per cent of the market, posted a very good 20 per cent rise in net profit for the nine- month period that ended September 30, 2012. The bank achieved a net profit of OMR104.2 million for the first nine months period this year as compared to OMR87.1 million in the corresponding period of the previous year. The bank’s net interest income grew by 5.2 per cent in the nine months to RO168.3 million, while non-interest income rose 11 per cent to OMR67.4 million.

The bank’s loan book grew by 18 per cent to OMR5.35 billion from the corresponding period of 2011.

Bank Muscat had a rights issue in July 2012 to raise OMR96.7 million aimed at enhancing Tier 1 capital. The proceeds of the issue will be utilised by the bank for financing growth resulting from the credit expansion in Oman, capitalising on emerging Islamic banking business and enhancing its capital adequacy ratio to enable readiness for adoption of Basel III when it is introduced.

The bank sees good opportunities in both the corporate sector, through the large industrial projects in the pipeline, and in retail banking, where there remains a sizeable unbanked market in Oman with over 50 per cent of the population less than 19 years old.